Why there should be limits on the rights of “legal persons”.

Earlier this week, Conservative and Liberal Democrat MPs voted down a powerful House of Lords amendment to the current Defamation Bill which would have made it far harder for companies to bring and thereby threaten libel actions in England and Wales. It may well be that such a provision can be put back in; the minister appears to have made some concession to this effect. But the vote raises a wider question of principle: to what extent, if any, should the law of libel look at humans and “legal persons” such as companies, and treat them just the same?

Human beings have legal rights, and there are things no person or group can do to human beings, without violating their legal rights. Human beings also have obligations imposed by statute or the common law. They can enter into and enforce contracts; they can hold and dispose of property; they can break the criminal law and be punished for doing so. All this because the law regards human beings as “natural persons” with “legal personality”. And at law, as with dogs, personality goes a long way.

The law, however, does not only recognise natural persons. It also recognises “corporations” as legal persons. These entities do not actually exist, at least in any tangible way. A Martian would not see them from space. They are abstractions. In the language of the law, corporations are “legal fictions”, which exist only to the extent that law allows. In the words of one eminent old judge, corporations have "no soul to be damned, and no body to be kicked". There may be human beings who hold shares and act as directors, but companies themselves are affairs of the mind.

Nonetheless, corporations are highly convenient legal creatures, and they have been a feature of English law from early times. For example, a so-called “corporation sole” such as a Bishopric could continue to hold property, separate to the person who happened to be bishop or whether there was a current bishop at all. A local authority could use its corporate status to employ staff and buy land for houses.

And corporations also became useful for commercial purposes, and these were usually called “companies”. Instead of merchants and manufacturers trading on their own accounts, they could form companies to manage and allocate certain business risks. If a company was unable to pay its debts, then the shareholders of the company could just walk away without personal liability. It was a legal device to protect commercial interests by limiting the legal exposure of those involved.

For a long time, companies were frowned upon. Even now the law requires that most companies need to have “Limited” in their name so as to warn others that the liability of the shareholders is limited. Until Victorian times it was actually quite difficult to form a company for commercial purposes, and it often required a special Act of Parliament. But then the idea took off when new companies legislation was passed, and it was made possible for companies to be formed with ease. Companies swiftly became the norm in business life.

So familiar are we now with companies, it is forgotten just how artificial they are. They are merely a way of arranging and managing certain legal relationships. That they have legal personality is a means to this end. Legal personality allows companies to enter into contracts, hold property, and be subject to legal obligations in the same manner as natural persons. But all this is for the purpose of the human beings connected to those companies not personally having those rights, powers and obligations instead.

In respect of defamation, it is entirely true that companies can have reputations, and that those reputations can be adversely affected by things which are said by others. The real question is the extent to which companies should be able to maintain an action for defamation in the way a natural person can. Lots of things have a reputation but which cannot sue for libel: for example, a racehorse or a business technique. These can be disparaged, and loss suffered, but there is no remedy in defamation. Furthermore, the courts have held that “public corporations” cannot sue for defamation, and nor can political parties. So why the exception for private corporations?

Companies already have a formidable range of legal protections for their reputation. They can protect their trade marks and they can sue for “passing off” against counterfeiters and imitators. Companies are protected from inaccurate advertising and unfair business practices of their competitors. They can bind their former employees to confidentiality. And they can sue in respect of deliberate lies under the tort of “malicious falsehood”. There are even the ancient rights of action in respect of slander to title (ie property rights) and to goods. In many ways, the law protects the reputations of companies far more extensively than it does the reputations of human beings. And, of course, directors and employees can sue for defamation their own names.

So what additional purpose is there in the general law of defamation protecting companies? Why should companies be able to sue for libel? It is certainly convenient for them, as it is easier to threaten a libel claim (where the onus is on the defendant to prove a defence) than it is for malicious falsehood (where the onus is on the claimant to prove both malice and falsity). And, in practice, companies have used defamation to effectively bully and chill their critics. Many City lawyers make their living from promoting “reputation management” to corporate clients. The law says that companies can only sue in respect of their “trading reputations” but, in practice, companies instruct their lawyers to issue libel threats for all sorts of criticism.

Given the range of legal protections already in place, there is a strong argument for the right of companies to sue for libel to be abolished. Any public interest in such a right existing is more than offset by the public interest in ensuring critics of companies not being subject to the chill of libel threats. Those involved in a company, after all, usually get the incredible legal privilege of limited liability; it would only be fair for such a privilege to be offset by the company facing the prospect of frank and uninhibited criticism.

During the recent libel reform debates, such an argument was mounted; but it failed to convince the government. However, the House of Lords passed an amendment making it difficult for companies to sue for libel unless they could convince a court at an early stage that the libel caused (or could cause) serious financial loss. The Lords amendment also made it impossible for private companies performing public functions to bring libel actions at all in respect of criticism of those public functions. This week, despite a spirited and impressive defence of these sensible protections by shadow justice secretary Sadiq Khan, the Lords’ amendment was lost. A watered-down version may still be re-introduced, but no one knows for certain.

Whatever the outcome of what is left of the passage of the Defamation Bill, there remains the issue of corporate power and how it is checked. That corporations have power, and that this power affects the lives of natural persons – human beings – there can be no doubt. That the corporations provide legal protections for those who are connected with the ciorporation is also true. The question is the extent to which the use of corporations can be subjected to the frank scrutiny of others. Even if there is a case for saying corporations should be able to sue for libel, it certainly should not be easy for them to do so, unless they can show actual or potential substantial loss.

And corporations should never be regarded as analogous with natural persons; they are simply legal fictions – albeit useful ones - and should always be treated as such.

David Allen Green is legal correspondent of the New Statesman and a media lawyer. He also writes the Jack of Kent blog.

David Allen Green is legal correspondent of the New Statesman and author of the Jack of Kent blog.

His legal journalism has included popularising the Simon Singh libel case and discrediting the Julian Assange myths about his extradition case. His uncovering of the Nightjack email hack by the Times was described as "masterly analysis" by Lord Justice Leveson.

David is also a solicitor and was successful in the "Twitterjoketrial" appeal at the High Court.